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Reacting to the Crisis: Biotech Venture Capital's Plan B

This article was originally published in Start Up

Executive Summary

There are significant dilemmas facing life sciences venture capitalists buffeted by the simultaneous but distinct insults of global financial calamity and trickier-than-ever biotech partnering, regulatory, and reimbursement environments. Venture's best bet at a return is an uptick in decidedly un-venture PIPE deals that take advantage of public biotechs' miserable valuations, but those deals aren't exactly growing on trees. Despite the surfeit of bad news, there may be a bright side.

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Biotech Angels Are Going Where VCs Fear To Tread

Many VCs have lost interest in early-stage investing, but angels - individuals who invest their own money alone or in groups - are stepping up to fill the gap. Angels are an especially good fit for for biotech start-ups that don't want to cede control of their companies to VCs too early, if at all. In addition to bringing valuable cash, angels put less pressure on start-ups to achieve an exit within a given time frame than traditional venture investors, and are more willing to accept buyers that may not be the highest bidders but will nevertheless be good stewards for their assets. For their part, companies looking to angels must understand the goals of their potential backers, since these financiers are often motivated by philanthropy and personal interest in a disease.

Biotech Angels Are Going Where VCs Fear To Tread

Many VCs have lost interest in early-stage investing, but angels - individuals who invest their own money alone or in groups - are stepping up to fill the gap. Angels are an especially good fit for for biotech start-ups that don't want to cede control of their companies to VCs too early, if at all. In addition to bringing valuable cash, angels put less pressure on start-ups to achieve an exit within a given time frame than traditional venture investors, and are more willing to accept buyers that may not be the highest bidders but will nevertheless be good stewards for their assets. For their part, companies looking to angels must understand the goals of their potential backers, since these financiers are often motivated by philanthropy and personal interest in a disease.

In the Midst Of A Shakeout, Biotech VCs Must Embrace New Partners, New Math

With funds and firms closing, a new reality awaits those who survive until the next economic upswing. Some of the elements are already in place, such as VCs' willingness to take capped returns and exits via risk-sharing contingency-based acquisitions. The emphasis on capital efficiency may change the types of companies VCs can afford to back, and corporate funds are now a vital part of biotech venture, especially in the early stages.

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